Company Accounting Australia New Zealand 5th Edition Jubb Solutions Manual

Company Accounting Australia New
Zealand 5th Edition Jubb Solutions

Manual
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Company Accounting 5e Solutions Manual
Peter Jubb Stephen Haswell Ian Langfield-Smtih
Chapter 11
Reports and disclosures I: Overview
11.1 Explain the relationship between the Corporations Act and the
accounting standards in the production of compulsory company
reports.
The obligation to prepare and distribute audited general purpose financial reports arises from Part
2M.3 of the Corporations Act. The obligation to comply with Accounting Standards arises in two
ways:
(i) To satisfy the general requirement that the financial report (the financial statements specified
in accounting standards (s. 295(1) (a) and (b)) and the notes to the financial statements) give a
true and fair view of the matters required by the Act (s. 297). The Courts have held that prima
facie those financial reports must adhere to Accounting Standards to give a true and fair view.
(ii) In addition, the financial report must comply with AASB standards [annual financial report –
s. 296(1); half year financial report – s. 304].
(iii) The obligation to present consolidated accounts is likewise specified in accounting standards
[annual financial report – s. 295(2) (b); half-year financial report – s. 303(2) (b)].
The application of accounting standards is subject to contrary requirements of the Corporations Act
or the regulations [see s. 334(1)]. Most AASB standards only apply to those companies (and other
entities subject to Part 2M.3) that are reporting entities. Since small proprietary companies are not
required to comply with s. 296(1) or s. 304, they do not have to comply with AASB standards to
satisfy the Corporations Act (except when required by a member request or an ASIC direction
under s. 293 or s. 294). The core accounting standards, AASB 101, AASB 107, AASB 108, AASB
1031 and AASB 1048 apply to all entities required to present financial reports under Part 2M.3.
Copyright © 2010 Peter Jubb, Stephen Haswell and Ian Langfield-Smith Version 5.0
2 Company Accounting 5e Solutions Manual
11.2 Which company reports are required by the Corporations Act? When
must the reports be delivered to members?
Type of report Type of entity (company, When delivered to owners

disclosing entity, registered
scheme)
Annual report:
• annual financial report and if • all entities other than small • public companies and
required by an accounting proprietary companies disclosing entities other than
standard, consolidated (s. 292 excludes small registered schemes – earlier
financial statements proprietary companies from of 21 days before AGM or four
• directors’ report preparing financial report and months
• auditor’s report directors report except if (a) • registered schemes – within
foreign controlled (and not three months of end of
consolidated in financial report financial year
lodged with ASIC), (b) • ‘large’ proprietary companies
shareholder request, or (c) (not being disclosing entities)
ASIC direction) – within four months from end
of financial year
• small proprietary companies
(member request) – later of
two months after request or
four months after end financial
year
Concise annual report (alternative to annual report):
• annual financial report and if • as for annual report • as for annual report
required by an accounting
standard, consolidated
financial statements
• directors’ report
• auditor’s report
Half year report:

• half-year financial report and if • disclosing entities No requirement to send to owners
required by an accounting
standard, consolidated
financial statements
• directors’ report
• auditor’s report (review or
audit)
Entities that produce and distribute a concise financial report as part of the annual report must still
prepare the full financial report and, if requested by a member, the member must be provided with a
copy of the full financial report. Both the full financial report and the concise financial report must
be lodged with ASIC.
Chapter 11: Reports and disclosures I: Overview 3
11.3 Summarise the disclosures that must be made in the financial report
of companies (other than small proprietary companies) that are not
reporting entities.
Companies, other than small proprietary companies, must prepare a financial report comprising the
financial statements specified in accounting standards (a comprehensive profit statement, a balance
sheet, a cash flow statement and a changes in equity statement), and if required by an accounting
standard consolidated financial statements [s. 295(2)] together with such notes as are necessary to
comply with the Act and accounting standards [annual financial reports – s. 296(1) and s. 297; half-
year financial reports – s. 304 and s 305]. The financial report must give a true and fair view of the
financial position and performance of the entity [s. 297 and s. 305]. If an entity is not a reporting
entity, it is only required to comply with the core accounting standards, AASB 101, AASB 107,
AASB 108, AASB 1031 and AASB 1048 since they are the only accounting standards that do not
exclude from their scope entities that are not reporting entities.
However, if the company produces financial reports and the ‘financial reports … are, or are held out
to be, general purpose financial reports’ then the application provisions of AASB accounting
standards require compliance even though the company is not a reporting entity.
As pointed out on pages 306–307, ASIC is of the opinion that the provisions of the Act requiring
the financial report to give a true and fair view (s. 297), the requirement that dividends can only be
made out of profits (s. 254T), together with the prohibition against giving false or misleading
information in documents lodged with ASIC (s. 1308), mean that the financial statements must
adopt the recognition and measurement rules in all relevant accounting standards. Therefore, even if
the disclosure requirements of non-core accounting standards do not have to be applied by non-
reporting entities, their measurement and recognition requirements must be satisfied. ASIC has not
as yet updated its views for the introduction of IFRS based standards.
11.4 What is the role of the notes to the financial statements included a
financial report?
The obligation to provide notes is imposed by s. 295(3) (or for half-years, s. 303(3)). The role of
notes to financial statements is to provide additional information to that included in the individual
financial statements. They are:
(a) disclosures required by the regulations; and
(b) disclosures required by the accounting standards; and
(c) any other information necessary to give a true and fair view.
Therefore the notes can serve one or following functions:

 to provide detail of information provided in summary form in the financial statements;
 to explain how information included in the financial statement has been prepared (for
example, statement of accounting policies);
 to provide information on events or transactions that do not satisfy the recognition criteria for
elements of financial reporting (for example, contingent liabilities and some post reporting
date events);
 to provide additional disclosure required by individual accounting standards; and

 to provide additional disclosures (to those expressly required by the Corporations Act, the
regulations and accounting standards) that are necessary to satisfy the overriding requirement
that the financial report gives a true and fair view of the entity’s financial position and
performance.
11.5 In financial reporting, a distinction is sometimes made between

presentation requirements (sometimes called display requirements)
and disclosure. Explain this difference in the context of the financial
reporting requirement under the Corporations Act.
Under the Corporations Act, an entity must prepare a financial report containing the financial
statements required by accounting standards (they are the comprehensive profit statement, balance
sheet, cash flow statement and changes in equity statement), and if required by an accounting
standard, consolidated versions of those statements. Also, additional matters must, or can be,
considered in the notes to the financial statements. Notes can be required by an accounting standard,
the Corporations Regulations or by the general requirement to give a true and fair view [annual
financial reports – s. 296(1) and s. 297; half-year financial reports – ss. 304 and 305].
Presentation is concerned with how information is displayed in the financial report (for example the
line items required by AASB 101 and 107 and the order in which they are presented) whereas the
disclosure requirement merely requires information to be included in the financial report, but
nothing is said about the way in which it is presented or displayed in the financial report. Most
accounting standards are concerned with recognition and disclosure, while relatively few are
concerned with presentation (the main exceptions being AASB 101 and 107, each of which contains
extensive presentation requirements).
11.6 Explain the concept ‘true and fair view’. What is its relevance in
current legislation?
The ‘true and fair view’ requirement is the general qualitative standard for financial reports
prepared under the Corporations Act (annual financial report – s. 297, s. 295(c) and (5)(d)(ii); half-
year report – s. 305, s. 303(4)(d)(ii)). The nature of a qualitative standard for financial reports was
discussed in chapter 3. (In many ways this question raises the same issues that are considered in the
answer to question 3.14.)
This question is directed to the distinction between prescriptive requirements and the general
qualitative requirement of a true and fair view (to be both enforceable and valid, Accounting
Standards need to be prescriptive rather than rely on general qualitative requirements) Mere
compliance with prescriptive requirements (such as most of those found in accounting standards)
may produce financial reports that fail to meet the qualitative characteristics required of financial
information discussed in the Framework.
11.7 Briefly explain the nature of the fair presentation requirement of AASB
101. How does it differ from the ‘true and fair view’ requirement?
Under AASB 101.13 fair presentation requires ‘faithful representation of the effects of transactions,
other events and conditions in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses set out in the Framework’. It is assumed that compliance with
AASBs will meet this requirement, although additional disclosures may be necessary. Thus, an
express frame of reference is adopted in deciding if the fair presentation requirement has been
satisfied; the financial statement element definitions and recognition criteria in the Framework.
However, there is no express frame of reference which can be used in deciding if the statutory
requirement of presenting a true and fair view of the requisite matters has been satisfied. A true and
fair view must be given of the entity’s financial position and financial performance, which may not
result from the application of the Framework, and will not necessarily result from compliance with
AASBs, hence the requirement to give such additional information and explanations so that the
requisite true and fair view is presented.
11.8 Explain the significance of the word recognised when used in an

accounting standard.
The concept of recognised is discussed on page 289. In many ways it is similar to the use of
recognised when talking of the elements of financial reporting. Here recognised means that an item
is reported in a financial statement, or incorporated in an amount reported in a financial statement.
The recognition of an asset or a liability will result in a change in the amounts reported in the
balance sheet; the recognition of an expense will be reflected in the comprehensive profit statement
and, to the extent that it is accompanied by the reduction in the amount of an asset or an increase in
the amount of a liability, it will affect the amounts reported in the balance sheet. Similarly the
recognition of revenue will be reflected in the comprehensive profit statement and, by either an
increase in assets or decrease in liabilities, reflected in the balance sheet.
The changes in equity statement and the cash flow statement depict, in a different manner, items
recognised in the balance sheet and comprehensive profit statement; the same events and
transactions will affect the amounts recognised in all the financial statements.
11.9 ‘The role of disclosure is wider than the role of recognition in the
preparation of financial statements.’ Is this statement correct? Provide
reasons to support your position.
Recognition is concerned with determining which elements of financial statements (revenue,

expense, assets, liability and equity) are included in the amounts reported in the financial
statements. They may be either reported separately or as part of an aggregate amount for a line item.
Disclosure relates to information contained in the financial statements and the notes to the financial
statements. The disclosures in the notes to the financial statements includes disaggregation and
explanations of the amounts reported in the financial statements as well as information that does not
relate to particular information included in those statements (for example, narrative disclosures).
Disclosures may also be required of elements of financial statements that do not meet the
recognition criteria in the framework or individual accounting standards (for example, contingent
assets and contingent liabilities under AASB 137 and un-recouped tax losses that do not result in
the recognition of a deferred tax asset under AASB 112).1 Therefore, it is correct to say that
disclosure has a wider role than recognition.
1
Under the Framework, the fact that a particular transaction or other even gives rise to one or more elements of
financial statements that are not recognised – although there may be disclosure about the transaction or other even in
the notes to the financial statements – are nonetheless instances of elements of financial statements. This is because
the definition of those terms (paragraphs 47–81) is dealt with separately from their recognition (paragraphs 82–98).
11.10 What is the overriding materiality guideline provided in AASB 1031?

Explain how the standard is used in determining whether or not data
should be disclosed in company financial reports.
AASB 1031 is discussed on page 295. AASB 1031 is designed (in part) to bring the qualitative
requirements of the Framework into an accounting standard.
Material is defined in AASB 1031 as follows:
Omissions or misstatements of items are material if they could, individually or collectively,

influence the economic decisions of users taken on the basis of the financial report. Materiality
depends on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.
[AASB 1031 Appendix]
and when applying materially, information must be disclosed if:
… its omission, misstatement or non-disclosure has the potential, individually or collectively,

to:
(a) influence the economic decisions of users taken on the basis of the financial report; or
(b) affect the discharge of accountability by the management or governing body of the entity
[AASB 1031.9]
Reference should also be made to the discussion in AASB 1031.10 to 19 (particularly guidelines in
AASB 1031.15) to understand how it is applied in particular situations. The definition and the
standard stress that both the nature and amount of particular items (or combinations of similar
items) and the item’s relationship with other items must be considered in deciding if particular
information is material. The dangers in relying on the quantitative guidelines in AASB 1031.15
cannot be overemphasised.
11.12 Do you agree with the following statement: ‘The application of

materiality is a straight forward process – all we have to do is apply
the quantitative guidelines in AASB 1031’? Provide reasons
supporting your answer.
This statement is incorrect. In AASB 1031 we are told that when applying materially, information
must be disclosed if:
… its omission, misstatement or non-disclosure has the potential, individually or collectively,

to:
(a) influence the economic decisions of users taken on the basis of the financial report; or
(b) affect the discharge of accountability by the management or governing body of the entity
[AASB 1031.9]
and material is defined as follows:
Omissions or misstatements of items are material if they could, individually or collectively,

influence the economic decisions of users taken on the basis of the financial report. Materiality
depends on the size and nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.
[AASB 1031 Appendix]
Decisions and evaluations made by users will not solely depend on the amount of an item; in some
instances an item of small amount may be vitally important to the outcome of the decision process.
For this reason, the definition and AASB 1031.10 stress that usually we must consider the nature
and amount of the item together and that we may need to consider an item together with similar or
related items in determining materiality.
11.11 Are questions, about whether to recognise information in financial

statements rather than to disclose it in the notes to the financial
statements, settled by judgement, or by reference to regulations, or
both? If regulation is involved, where are those regulations to be
found? (In this context, regulation includes both the Companies Act
and accounting standards.)
The overriding requirement is that the financial report gives the requisite true and fair view of the
matters required by the Act. In some circumstances, this overriding requirement may mean that
information must be disclosed in the financial statements rather than in the notes to the financial
statements. In such a case, there will be the need to exercise informed professional judgement. The
need to consider the true and fair view requirement of the Act is minimised by the presence of rules
in the accounting standards that require certain information to be included in the financial
statements. Most import of these is the listings of line items to be included in those statements (see
AASB 101.54 and 82 and AASB 107.10 and 35). Additional line items are to be included in the
balance sheet when they are ‘relevant to an understanding of the entity’s financial position’ (AASB
101.55) and further sub-classification of balance sheet line items – either in the balance sheet or in
the notes to the financial statements – must be made ‘in a manner appropriate to the entity’s
operations’ (AASB 101.77). In the comprehensive profit statement additional line items are
included when doings so is ‘relevant to an understanding of the entity’s financial performance’
(AASB 101.85), and when items of ‘income and expense are material’ their nature and amount
must be disclosed either in the comprehensive profit statement or the notes to the financial
statements (AASB 101.97). Determining if such additional line items are to be included in each
case depends on the exercise of informed professional judgement about the relevance to
understanding either financial position or financial performance, determining what is ‘a manner
appropriate to the entity’s operations’ or assessing materiality. So, determining what information is
to be included in financial statements is the result of the combined operation of professional
judgement and regulations.
The recognition of the elements of financial statements is central to what amounts are included in
the financial statements. Individual standards contain recognition criteria (for example, AASB 112,
118, 137 and 138). In most cases, these recognition criteria are refinements of those in the
Framework. (Since the Framework is not an accounting standard, it is not a regulation in the sense
of that term is used in this question.) In most cases, those recognition criteria depend on
assessments about the probability of future cash flows, and whether or not there is available a
reliable measure.
11.13 ‘AASB 108 does not require the disclosure of all accounting policies
adopted by a company. This is an unsatisfactory state of affairs.’
Describe the circumstances, if any, in which an accounting policy
need not be disclosed. Explain the rationale underlying any such
exclusion. Do you agree that the exclusion is inappropriate? Give
reasons to support your answer.
AASB 101.117 requires a disclosure of ‘significant accounting policies’ relating to the

measurement basis or bases adopted and ‘other accounting policies that are relevant to an
understanding of the financial report’. Thus, if a user of a financial report would not need to have a
description of a particular accounting policy in order to understand the financial report, it need not
be described in the summary of accounting policies. A policy may be significant because of the
entity’s operations even if the amounts for current and comparative reporting periods are immaterial
(AASB 101.121). We provide the following rationale for this process on page 295:
Note that AASB 101.117(b) uses the words ‘relevant to an understanding of the financial report’
rather than relying on materiality. The adoption or non-adoption of a particular accounting
policy may have a material impact on the amounts reported in the financial report without there
being a need to describe that policy – users will be able to understand the financial report
without that disclosure. Accordingly, although an accounting policy must be adopted under
AASB 108, if a description of that policy is not likely to affect the decisions and evaluations
made by users, it should not be included, since it would have the potential to distract from those
policies that do so.
In part this approach recognises that to disclose all accounting policies, or all those with material
consequences, produces a risk of obscuring information that is important to understanding the
financial report – a form of information overload.
11.14 Outline the requirements of AASB 108 that concern revisions in

accounting estimates. How do these requirements affect the
usefulness of the comprehensive profit statement to users of those
reports?
See pages 297–299 for the distinction between a revision of an accounting estimate and an error.
Revisions (changes) in accounting estimates only have a prospective impact. They are recognised as
either a revenue or an expense:
 in the reporting period in which the revision is made if they only affect that reporting period;
or
 in the reporting period in which the revision was made and future reporting periods if they
affect both the reporting period and subsequent reporting periods (AASB 108.36).
We cannot revise an accounting estimate for earlier reporting periods by revising the prior period
financial statements (AASB 108.38). Under the pre-IFRS standard, the revision had to be included
in the ‘same category within the statement of financial performance’ as was used for the previous
estimates, but this does not mean the later date revision was a set-off of the original disclosure
(AASB 1018.6.1). Thus if the event or transaction was originally recognised as an expense, in the
current reporting period it would have been recognised as a revenue, not a reduction in the expense.
There is no longer such an express requirement.
The impact on the usefulness of the comprehensive profit statement is a matter of opinion. Since
accounting estimates reflect the information available at the time the estimate was made, it is
reasonable to expect that changes in the available information will require a reassessment of the
estimate. If the financial report is to reflect the financial performance and financial position at
reporting date, and the evidence available at that reporting date, then to retrospectively reinvent
financial reporting history in a way that does not reflect the facts at the time would undermine the
utility of the financial statements. Accordingly, the requirement for prospective adjustment only
enhances rather than undermines the quality of financial reporting.
11.15 Outline the requirements of AASB 108 that deal with errors. Do those
requirements enhance the quality of financial reports?
Errors arise from mathematical mistakes, incorrect recording of data, the misapplication of
established accounting policies, the misinterpretation of facts, fraud and oversights.
The treatment of, and disclosures for, errors are discussed on page 299. Errors are corrected
retrospectively; that is corrections are made to the relevant comparative period amounts in the first
financial report authorised after the discovery of the error (AASB 108.42). The disclosures about an
error are only made in the reporting period in which the error is corrected by an adjustment to the
comparative amounts.
Regardless of how serious the error was, it seems that disclosures are limited to the notes to the
financial statements; there is no requirement for the adjustment to be reported as a separate line item
in the comparative amounts. However, the fact that the correction has been made to the comparative
amounts facilitates comparisons with amounts for subsequent reporting periods.
The impact on the usefulness of the comprehensive profit statement is a matter of opinion. If the
financial report is to reflect the financial performance and financial position as it in fact was, rather
than it was perceived to be at the time, then retrospective correction of the financial statements
through the comparative amounts is appropriate. In the case of an error, the problem is not one of
the inherent uncertainties of the financial reporting process that will change with the information
that is available. It can be argued that correction of the error in the current period financial
statements, rather than the comparative amounts, results in financial statements that do not reflect
the events and transactions occurring during the reporting period. Whichever approach is taken, the
potential to mislead users can be mitigated by disclosure; however, it can be argued that
retrospective restatement of comparative amounts will cause confusion if users look at prior period
financial reports.
11.16 Compare and contrast the treatment of prior period errors and
revisions of accounting estimates under AASB 108.
Under AASB 108 prior period errors are corrected retrospectively, that is, the relevant amounts in
the comparative amounts are adjusted for the error. A change in an accounting estimate results in
prospective changes only; for example, a change in expectations about the useful life or disposal
amount for an asset is reflected prospectively from the date on which the revision was made.
Similarly an impairment expense is recognised in the period in which management became aware
that the asset was impaired, with corresponding adjustments to future reporting period depreciation
due to the change in the remaining depreciable amount.
11.17 A distinction can be drawn between the selection of an accounting

policy and the selection of the method or methods by which the policy
is implemented. Compare and contrast the required treatments for
changes in accounting policies and changes in the methods by which
an accounting policy is implemented.
Under AASB 108, accounting policies appears to include rules and procedures that are used to
apply a particular policy. However, the requirements of AASB 108 are, in fact, difficult to reconcile
with the definition of accounting policies. This makes the standard difficult to comprehend and
apply.
Changes in methods by which an accounting policy is implemented affects the amounts that are
included in the financial report, and as such can be characterised as involving a change in an
accounting estimate, which is only made with prospective effect. The selection of an accounting
policy involves a choice between competing alternatives (for example, the selection of the
measurement basis to be adopted), each of which will have its own implementation variations.
When a change is made to such accounting policies, the change is made retrospectively.
Apparently, if something could be characterised as a change in an accounting estimate or a change
in an accounting policy it is to be treated as a change in an accounting estimate.
11.18 Describe the role of judgement in the selection and application of

accounting policies under AASB 108.
This issue is discussed on page 301, where it is stated that:
The selection and implementation of accounting policies frequently involves the exercise of
informed judgment. The exercise of that judgement takes place in, and must allow for, the
context of the circumstances facing the entity. Those circumstances include the known facts,
expectations about the future, and determination of which facts and expectations are relevant to
the selection and implementation of the accounting policy. Whenever judgment is involved,
there is a potential for different decisions to result. Accordingly, some variation in the carrying
amount of assets and liabilities is possible, as is variation in the amount of revenues and
expenses recognised in a reporting period. When considering the implementation of an
accounting policy, these judgements underlie the estimation process and any changes in them
are changes in accounting estimates that have a prospective impact only. Such differences of
opinion are inherent in the financial reporting process. However, the improper application of an
accounting policy, or a clearly unsustainable policy selection, is an error, and must be corrected
retrospectively. For example, a decision to depreciate all plant on a straight-line basis with no
residual over 10 years, when it was obvious that:
• some items of plant would have a material residual amount;
• some items of plant would have a shorter or longer useful life; and
• for some items of plant the pattern of consumption of economic benefits is best estimated
by the units of production method;
would be an error and would have to be corrected retrospectively. Similarly, a decision to use
the weighted average method to estimate the cost of inventory when some items of inventory
were heterogeneous rather than homogeneous would be an error.
11.19 Why is it necessary to include a third column in the balance sheet

when there is a change in the presentation of the financial statements
or a change in accounting policy or error correction that is made
retrospectively?
In each case, the retrospective application of those requirements will change amounts that were
included in prior period balance sheets. Since an informed appreciation of changes in financial
position is one of the tasks undertaken by users, and frequently involves information for the start of
the comparative reporting period, this is usually found in the prior annual financial report. However,
when retrospective changes such as these are made, the information contained in the prior financial
report will not have been adjusted, and the use of information from the prior financial report would
be inappropriate.
11.20 Explain what is meant by ‘events occurring after reporting date’.

Distinguish between events that must be recognised and events that
must be disclosed in a note. Give an example of each.
See pages 301–303 and AASB 110 (this standard uses the term ‘events after the end of the reporting
period’ rather than the shorter ‘events occurring after reporting date’). The financial statements
must be prepared on the basis of conditions existing at reporting date. Post reporting date events are
of two types:
• adjusting events: those providing additional evidence of conditions existing at reporting date
(affect recognition– amounts must be disclosed in financial statements)
• for example, a debtor’s bankruptcy shortly after reporting date is new evidence
concerning the non-payment of the debt and, in particular, its recoverability at the
reporting date; and
• non-adjusting events: those relating to conditions that did not exist at reporting date (do not
affect amounts disclosed in financial statement – does not affect recognition; note
disclosures only)
• for example, destruction of plant after reporting dates.
11.21 For each of the following explain how they must be treated under
AASB 110. In each case, the reporting date is 30 June and the
approval date of the financial report is 20 September. In answering
each part, you must also consider the requirements of any other
relevant accounting standards.
We have attempted to make the following solutions as comprehensive as possible. In doing so we

have included matters not yet discussed in the book and matters that are not discussed at all. The
extent to which students incorporate these additional considerations will depend on their past
exposure to the different aspects of the issues raised. Accordingly, a satisfactory answer to the
question need not consider all of the matters raised below. Indeed, diligent and knowledgeable
students are likely to raise many other aspects in answering the questions.
(a) On 15 July, it was discovered that the quantity of inventory on hand at reporting date was
overestimated by $500 000. The inventory was contained in boxes stacked in a warehouse 10
high, 40 long and 20 deep. It was discovered that the middle of the stack was empty.
The quantity of inventory on hand at reporting date relates to a condition that existed at reporting
date. Therefore we have an adjusting post reporting date event. Therefore under AASB 110 the
discovery must be recognised in the amounts included in the financial statements – in particular the
carrying amount of the inventory presented in the balance sheet.
It may be that the amount and nature of the overstatement would require disclosure in the notes to
the financial statements (see, for example, the requirements of AASB 101.77 and 97 considered in
chapter 12).
(b) On 2 August, following a share market rout, commodities prices declined by an average of
30%. The company had a significant holding of wool, the price of which declined by 35%. This
resulted in the estimated proceeds of sale declining by $8 000 000.
While the company held significant quantities of wool at reporting date, the decline of 35% in wool
prices following the share market rout, is not evidence of a condition existing at reporting date (the
estimated net realisable amount of inventory – used in the lower of cost or net realisable value
measurement rule required by AASB 102 (see chapter 3)). Therefore, we have a non-adjusting, not
an adjusting post reporting date event, so we must disclose in the notes to the financial statements
the subsequent material decline in the carrying amount of inventory and a description of the
circumstances giving rise to that decline. There would also be a statement that the effect of the post
reporting date event is not reflected in the amounts recognised in the financial statements.
(c) The facts are the same as in (b), except that the company had entered into forward sales
agreements at or above the market price of wool at reporting date.
A forward sale agreement is a form of hedging (see chapter 9). Arguably the combined effect of the
requirements of AASB 7, 132, 139 and 110 is that we should disclose the post reporting date event,
the potential effect but for the forward contracts, and the impact of having the forward sale
contracts in place.
Since users of the financial report may be aware that the company held a large inventory of wool at
reporting date, as well as being aware of the subsequent 35% price decline, the information would,
in the terms of both AASB 108 and AASB 101.97 (see chapter 14), be necessary for an
understanding of the financial report and thus is material under AASB 101.97.
When we have a non-adjusting post reporting date event, we must also include in the notes to the
financial statements a statement that the effect of the event is not reflected in the amounts presented
in the financial statements.
(d) Some time between 6 p.m. on 30 June and 7 a.m. on 1 July, thieves broke into the company’s
warehouse. They made off with inventory with a carrying amount of $700 000 (replacement
cost $850 000) and severely damaged the building. Temporary repairs were completed on 5
July at a cost of $15 000. A tender for full repairs was called on 8 July. On 30 July, the
company decided to accept a tender of $325 000 for the repair work (variations to be charged
at scheduled rates). The work was completed on 4 October at a total cost of $345 000. The
final payment was made on 15 October. (In answering this question ignore the possibility that
the losses sustained were covered by insurance.)
On the facts, it is unclear if the theft of the inventory and the damage to the building occurred
during the reporting period. Thus we could have either an adjusting or a non-adjusting post
reporting date event.
When does the reporting period end? Does it end at the close of business, midnight, any time up to
commencement of operations for the next reporting period? We suggest that a probability approach
be taken – was it more likely that the theft occurred before midnight or after midnight? However,
what of the possibility that the theft spanned both the night of 30 June and the early morning of 1
July? Unfortunately, we cannot provide a definitive answer – this type of situation is not discussed
in AASB 110. Thus we may have both an adjusting and a non-adjusting post reporting date event.
If the theft and subsequent damage occurred during the reporting period, then we would recognise
the dollar amount of the inventory stolen ($700 000), and may need to disclose the significantly
higher estimated replacement cost (on the basis that doing so would be necessary to an
understanding of the financial report). What of the damage to the building – do we recognise both
the cost of the temporary repairs and the final repairs as an expense? Under AASB 136, to the
extent the damage results in the carrying amount of the building exceeding its recoverable amount,
the building is impaired and we must recognise an expense for the reporting period (if, however, we
use the revaluation model under AASB 116, any impairment would be treated as a revaluation). The
application of the revaluation model under AASB 116 and impairment under AASB 136 is
discussed in chapter 9. If it is anticipated that sales will be lost due to an inability to supply goods,
this fact must be disclosed in the notes to the financial statements if it is expected to have a material
effect and, if practicable, the dollar amount should be disclosed.
The recognition of the costs of repairing the building is not directly addressed in accounting
standards, however the general principles established in the Framework for the recognition of
expenses should be applied. Ultimately it comes down to whether, at reporting date, the company
had a present obligation to an external entity to make good the damage. That is, was there an
obligation to transfer economic benefits to such an entity arising from the need to repair the
building? Under the Framework it is envisaged that:
 we do not need a legal obligation for there to be a liability – an equitable or constructible
obligation is sufficient; and
 we do not have to be able to identify the particular individual to whom to obligation is owed
(provided we can identify the class of person to who the obligation is owed).
Even if the company is under a legal obligation to repair the building (for example, under
occupation health and safety or public safety requirements), it is doubtful that the definition of a
liability is satisfied. It is our view that while the events that occurred during the reporting period
made it necessary for the two types of repairs to be made, they are not of themselves a measure of
events or conditions existing at reporting date such that they must be recognised in the financial
statements. Thus, the need to repair, and the cost of temporary repairs and the permanent repairs (an
estimate of the latter if they had not been completed at the date on which the financial report was
finalised) would be provided in the notes to the financial statements. Disclosure of the anticipated
effect of disruption to operations would also have to be disclosed (although it may be impracticable
to estimate the dollar amount).
When we have a non-adjusting post reporting date event, we must also include in the notes to the
financial statements a statement that the effect of the event is not reflected in the amounts presented
in the financial statements.
(e) On 15 August, the company’s auditors reported that they had discovered a serious problem
with the accounting software that the company was using. This resulted in an understatement
of accounts payable. The amount of the understatement was unknown, but the auditors’
believed it was at least $300 000 at reporting date. By 5 September, a working group of
external consultants, the CFO and the auditor agreed that the misstatement was $325 000. On
15 October, it was discovered that, because of an error in the algorithm used to estimate the
understatement, the amount of the error had been overstated by $45 000.
Here the errors with the accounting software means that the company’s accounting system did not
report the amount of accounts payable at reporting date (30 June); therefore we have an adjusting
event the effect of which must be recognised in the financial statements. The amount recognised
will depend on when the financial report for the reporting period was completed; here the approval
date is 20 September, and the financial report would include the best estimate of the amount of the
error at that date; that is $325 000. Given the nature of the error, it is possible that at approval date
there was a material uncertainty about the amount of the understatement, in which case appropriate
disclosure would need to be included in the notes to the annual report.
11.22 For each case in question 11.21, describe the impact – if any – on the
information contained in the financial report for the following
reporting period.
AASB 110 does not expressly deal with what must be done in the financial report for the following
reporting period. If we had a non-adjusting post reporting date event, then the amount will be
recognised in the subsequent reporting period. This would be the case of (b), (c), and possibly (d).
In each case it may be necessary to make separate disclosure of the amount and nature of any
resulting expense or revenue under AASB 101.97 (see chapter 12). In cases (a), (e) and possibly (d)
there were adjusting post reporting date events, therefore the amount would have already been
recognised. For case (e), the amount recognised may have been more than ultimately was found to
have been the amount of the understatement of liabilities.
As we will see in chapter 12, the incorrect inventory measurement is an example of an error rather
than a change in an accounting estimate. Disclosure may be required under AASB 101.97 if it is
necessary to explain the entity’s financial performance, since the resulting expense or revenue is
material – if so, the disclosure is of its ‘nature and amount’.
For (e) it is possible that to the extent that it was not sufficiently covered in the prior year’s
financial report, disclosure may be required in respect of the repairs to the building.
11.23 For each of the following independent items, explain if they are
material or immaterial under AASB 1031. In each case provide reasons
for your answer.
If the relevant base amount is an after-tax amount then, for the item, we are told to use its after-tax
amount; that is, adjust the item for its tax effect (tax effects are discussed in chapter 10).
Nonetheless, we believe that considering the item net of any tax effect is inconsistent with the
general prohibition against offset in AASB 101.
We have provided answers adjusting for tax and not adjusting for tax.
(a) Profit for the reporting period is $30 000 000. The company has recognised brand names of
$25 000 000 as an asset in its balance sheet (total non-current assets $220 000 000). The
company does not amortise (depreciate) the brand names under AASB 138, because the
amount amortised in any reporting period would be immaterial because of an extended useful
life of 50 years. (Assume that straight-line amortisation is used). Is this decision consistent
with the application of materiality under AASB 1031?
In applying materiality we need to consider (i) the impact on period profit or loss and (ii) the impact
on the carrying amount of the brand names in the balance sheet.
Impact on the profit of loss statement: Depreciating (amortising) on a straight line basis over 50
years would result in the recognition of an expense in each reporting period of $25 000 000/50 =
$500 000. If the tax rate is 30%, then any tax effect would be $150 000, giving a net expense of
$350 000. Thus we have 1.17% of period profit or loss, which applying the quantitative guidelines
would suggest that the non-depreciation would not have a material impact on reported profit.
Impact on the balance sheet: The impact on the carrying amount of the asset is more problematic.
We must first determine the appropriate base amount, which AASB 1031 suggests is the class of
asset or liability. In current accounting standards the term ‘class of assets’ is not defined, however,
we believe it has the meaning previously given to it in AASB standards; that is, it is normally
determined by reference to the lowest level of aggregation used in the financial report (this includes
note disclosures). Here this would presumably be the class ‘brand names’, a component of the line
item ‘intangibles’ required by AASB 101.54(c). The total non-current assets is $220 000 000, so
11.36% of non-current assets is represented by goodwill, which is suggestive of its materiality.
In the reporting period in which the brand names were first recognised, the amount of the brand
names would be material (requiring recognition for balance sheet purposes) but would the amount
of the depreciation recognised be material? Applying the quantitative guidelines we would have
$500 000/$25 000 000 = 2%. However, after five years the difference will be $2 500 000. If the
brand names have not been depreciated, their carrying amount is overstated by 10%, which is
clearly material. The guidance in AASB 1031 does not address this problem of cumulative
materiality.
How did such a confusing situation come about? We believe it is the result of the insistence of
standard setters that materiality not only relates to disclosure but also to the application of
recognition rules. In our view the materiality test should be applied to the depreciable amount of the
asset – if that amount is material, then AASB 138 must be applied, and when there is a limited
useful life (rather than indeterminate or unlimited), it must be amortised.
(b) During the reporting period, the discontinuation of some of the operations acquired under a
cash takeover (total cash paid to vendors $10 000 000) completed in the first week of the
reporting period resulted in reorganisation costs of $500 000. The profit for the reporting
period was $25 000 000.
The determination of materiality will in part depend on the way reorganisation costs are recognised.
They might be an expense or part of the cost of a new acquisition. In chapter 9 we consider the
extent to which such cost form part of the cost of acquisition of an entity or business. The
authoritative guidance includes AASB 5: Non-current Assets Held for Sale and Discontinued
Operations (considered in chapter 9), and AASB 137: Provisions, Contingent Liabilities and
Contingent Assets (also considered in chapter 9). AASB 137 deals with restructuring, whereas here
we have a discontinued operation which is within AASB 5. A discontinued operation can be
characterised as an extreme form of restructuring; one that (ultimately) results in the operation no
longer being undertaken.
First, consider recognition of the costs of discontinuing the operation as an expense. In terms of the
AASB 1031 quantitative guidelines it would – all other things being equal – be presumed to be
immaterial. The expense is 2% of period profit or loss ($500 000/$25 000 000) or 1.4%
($350 000/$25 000 000) after tax, though it is unclear whether these costs are tax deductible.
However, for disclosure purposes it would be material because of its nature not its amount. Under
AASB 5.30, the information disclosed must enable users to evaluate the financial effects of the
discontinued operation. In doing so AASB 5.33(a) requires a comprehensive profit statement line
item, and an analysis of that line item. These requirements suggest that materiality will be strongly
influenced by the nature of the item, not merely its amount, and that disclosure is likely to be
important to users.
If the reorganisation costs are a component of the cost of the business combination, then, as a first
step, it must be established whether the business combination cost is material. If it is material,
AASB 3.B64(f) requires that it be disclosed. Is it necessary to make a further disclosure of the
portion of the cost of the business combination attributable to the discontinuing operation? The
nature of the costs being capitalised (reorganisation costs) suggests a lower disclosure threshold
than would normally be the case for disclosure of the cost of the business combination itself.
Therefore, it is necessary in making disclosures about the cost of the business combination to
separately disclose the amount of the reorganisation costs included. The reorganisation cost
amounts to 5% of the other costs of acquisition – ($500 000/$10 000 000) [3.5% if there is a tax
effect]. Since the acquisition has already been recognised, a lower threshold would seem
appropriate as it would be necessary to explain the nature of the amount capitalised.
(c) During the reporting period, a loss of $200 000 was recognised on foreign currency
transactions associated with the sale of inventory. The profit was $10 000 000. This was the
first year of a three-year program to establish overseas markets for the company’s products.
As a percentage of period profit or loss, the loss after tax effects was 1.4% ([$200 000 x
0.7]/$10 000 000). The amount is not material on that basis. However, it may well be material when
considered as a percentage of foreign currency sales – such a comparison is consistent with
commentary in AASB 1031). Given that this is the first year of a three-year overseas expansion
program, the incidence of such losses may well increase, thus the nature and context would suggest
that disclosure would be material. Also, AASB 101.97 (see chapter 12) would probably require
disclosure of the amount and nature of the expense.
11.24 ‘Provided the financial report of a public company that is not a

reporting entity is prominently described as a special purpose
financial report, there is no need to comply with any of the AASB
accounting standards.’ Do you agree with this statement? Provide
reasons to support your answer.
This statement is incorrect. While most accounting standards only apply to reporting entities, the
core accounting standards, AASB 101, AASB 107, AASB 108, AASB 1031 and AASB 1048 apply
to all entities whose financial reports are regulated by the Corporations Act. Further, an entity must
comply with other accounting standards to the extent that doing so is necessary to give a true and
fair view of the matters required by the Corporations.
11.25 Explain how including comparative information in financial reports

might help users of the reports to evaluate the operating, financing
and investing activities of a company.
The information provided in a financial report is essentially static; without comparative information
users will find it difficult to discern trends in the operating, financing and investing activities of the
firm. This could be achieved by users aggregating information from a sequence of financial reports;
however, changes in accounting policy and corrections of errors may cause significant problems.
Changes in accounting policies and the correction of errors are incorporated in the comparative
amounts, making it easier for informed evaluation to be made by users.
General requirements for comparative amounts are contained in AASB 101.38-44, with many other
accounting standards imposing specific requirements.
11.26 How is the provision of comparative information affected by each of

the following?
(a) Changes in accounting policy.

(b) The discovery of a prior period error.
(c) The revision of accounting estimates.
Since, under AASB 108, both changes in accounting policies and corrections of material errors are
implemented retrospectively, the comparative information is adjusted on the basis that the new
accounting policy had always been applied or that the error had never be made. This may require a
restatement of the opening retained profits for the earliest reporting period for which comparative
information is provided. These retrospective adjustments need not be made if it is impracticable to
do so, in which case additional note disclosures are required. Under AASB 108 changes in
accounting estimates are recognised prospectively, accordingly they do not affect the comparative
amounts.
11.27 Is it appropriate for a financial report to contain narrative information?

If narrative information is included, should comparative information
for preceding reporting periods be included? Provide reasons to
support your answer.
Often, merely presenting items and their amount in the financial statements is insufficient to allow
users to fully understand their significance in interpreting the financial report. This is why many
accounting standards require non-quantitative disclosures, the most general of which deal with the
accounting policies adopted in the financial report (see AASB 108). The following standards
require extensive non-financial disclosures, to assist users towards a proper understanding of the
items these standards deal with, and appreciation of their significance: AASB 7 about financial
instruments; AASB 121 about foreign currency translations (see chapter 8), and AASB 137 about
provisions, contingent liabilities and contingent assets (discussed in chapter 9).
If narrative information is included – as we believe it must – for the financial report to be useful,
should comparative information be provided? AASB 101.38 requires such comparative information
when it is ‘relevant to an understanding of the current period’s financial report’. The requirement to
include comparative information is not limited to information required by an accounting standard.
An example of when comparative narrative information would be relevant to understanding the
financial report would be where, in the prior reporting period, disclosure was made about a non-
adjusting post reporting date event and subsequent evidence requires additional information to be
given about that event in the notes to the financial statement in the current reporting period; for
example, that the basis previously used to estimate the amount was subsequently found to be
incorrect.
11.28 If an error in a prior period financial report is discovered in the current

reporting period, how does it effect the obligation to include
comparative amounts in the financial report?
The relevant requirements are discussed on page 299.
When a material prior period error has been discovered in the financial reports of reporting periods
for which comparative information must be provided, under AASB 108.42 comparative amounts
are restated unless it is impracticable to do so (AASB 108.43). Under AASB 108.49 disclosure is
required of the nature of the error and of other information plus, to extent practicable, the impact on
each financial statement line item).
11.29 Give a summary of the requirements of the directors’ report. Do you

see an overall purpose in the directors’ report? Explain.
The requirements for an annual directors’ report are summarised on pages 304–305. Its content can
be divided into four categories:
Category 1: general information

Provided unless all members agree otherwise. It includes:
• review of:
 operations and results
 significant changes in state of affairs during the year
• information on matters arising since the end of the year that may affect the entity’s:
 future operations
 results
 state of affairs
• details of environmental performance if an entity is subject to ‘particular and specific
environmental regulation’.
Information can be omitted only if it is ‘likely unreasonably to prejudice the entity’ – and it must
state that prejudicial information been excluded.
Category 2: Specific information

Unless disclosed in the financial report, information on:
• dividends paid, recommended and declared
• names and other details of the directors
• options granted (separately identifying those granted to directors)
• shares issued during the reporting period
• indemnities given to, or insurance premiums paid for the benefit of, any director, officer or
auditor.
• for listed companies only:
 discussion of policy for determining remuneration of directors and senior executives
 relationship between that policy and company’s performance
 details of nature and amount of ‘emolument’ of:
 each director
 each of top highest ‘emolumented’ company officers (each being named).
Category 3: Special rules for public companies (not being wholly-owned subsidiaries of a
company or recognised company)
• qualifications of directors
• number of board and committee meeting attended
Category 4: Special rules for listed companies and other listed disclosing entities
Disclosures of information relevant to assessment by members of the listed entity’s operations,
financial position, strategies and prospects.
For listed companies only, information must be provided:
• of each director’s interests in the contributed capital, debentures or options to acquire such
securities, and any contracts with the entity; and
• that allows an assessment of the independence of the company’s auditor.
Category 5 Special rules for companies that are disclosing entities

Disclosure is required of:
• its remuneration policy for key management personnel (including a remuneration report);
and
• details of how the remuneration is allocated to those key management personnel (s. 300A).
(For non-company disclosing entities similar disclosure is required by AASB 124.)
The overall purpose appears to be to (a) place the information contained in the financial report in
context and (b) provide other information that is likely to be relevant to an informed interpretation
of the financial report (in terms of the types of evaluation discussed in SACs 1 and 2; that is
financial position, performance, operating, financing and investing activities).
11.30 Explain and distinguish between the directors’ declaration and the
directors’ report.
The directors’ declaration forms part of the financial report (annual or half-year) whereas the
directors’ report does not. The directors’ declaration involves a formal declaration by directors’
whether (in their opinion):
• there are reasonable grounds to believe that company will be able to pay its debts as and
when they become due; and
• financial statements and notes are in accordance with Corporations Act, including:
• compliance with accounting standards (section 296) ; and
• giving a true and fair view (section 297).
The directors’ report contains additional information that is assumed to be relevant to discharge of
accountability by directors (see answer to question 11.29 for details).
11.31 Contrast the reporting obligations imposed by the ASX with those
imposed by the Corporations Act and accounting standards.
Except for mining companies, the timing and frequency of reporting to the ASX is similar to that
under the Corporations Act. Additional reporting obligations (including quarterly reports – mainly
production statistics) are placed on mining companies. In addition, the ASX requires a preliminary
annual financial report to be lodged not later than two months after the end of the reporting period
(LR 4.3b); it is in the same form as the half-year report. The standard format information required
in the half-year and annual financial information can result in far more extensive disclosures than
those required in the reports required by the Corporations Act. The standard format means that
comparability of disclosures is improved.
11.32 How does the ‘general information about operations’ required by

s. 299 of the Corporations Act help users to understand the financial
information provided by a company?
This information adds context to the primarily financial information contained in the company’s
financial report. In so doing, it is intended to assist users of the financial statement in making the
evaluations of the company’s financial position, results of operations (operating, investing and
financing activities) and in the discharge by directors of accountability.
The exclusions of some information (the ability to exclude prejudicial information) can severely
limit the ability of the disclosures to effectively and efficiently serve this purpose. The nature and
extent of the disclosures is also far less than would have been required by the ‘general management
discussion’ that was proposed in the first exposure draft that ultimately resulted in the CLR Act
1998.

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Type of report Type of entity (company, When delivered to owners

Half year report:

Therefore the notes can serve one or following functions:

 to provide additional disclosure required by individual accounting standards; and

11.5 In financial reporting, a distinction is sometimes made between

11.8 Explain the significance of the word recognised when used in an

Recognition is concerned with determining which elements of financial statements (revenue,

11.10 What is the overriding materiality guideline provided in AASB 1031?

Material is defined in AASB 1031 as follows:

Omissions or misstatements of items are material if they could, individually or collectively,

and when applying materially, information must be disclosed if:

… its omission, misstatement or non-disclosure has the potential, individually or collectively,

11.12 Do you agree with the following statement: ‘The application of

… its omission, misstatement or non-disclosure has the potential, individually or collectively,

and material is defined as follows:

Omissions or misstatements of items are material if they could, individually or collectively,

11.11 Are questions, about whether to recognise information in financial

AASB 101.117 requires a disclosure of ‘significant accounting policies’ relating to the

11.14 Outline the requirements of AASB 108 that concern revisions in

11.17 A distinction can be drawn between the selection of an accounting

11.18 Describe the role of judgement in the selection and application of

This issue is discussed on page 301, where it is stated that:

11.19 Why is it necessary to include a third column in the balance sheet

11.20 Explain what is meant by ‘events occurring after reporting date’.

We have attempted to make the following solutions as comprehensive as possible. In doing so we

11.24 ‘Provided the financial report of a public company that is not a

11.25 Explain how including comparative information in financial reports

11.26 How is the provision of comparative information affected by each of

(a) Changes in accounting policy.

11.27 Is it appropriate for a financial report to contain narrative information?

11.28 If an error in a prior period financial report is discovered in the current

The relevant requirements are discussed on page 299.

11.29 Give a summary of the requirements of the directors’ report. Do you

Category 1: general information

Category 2: Specific information

Category 5 Special rules for companies that are disclosing entities

11.32 How does the ‘general information about operations’ required by

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